Edited version of private advice

Authorisation Number: 5010056163338

Date of advice: 17 July 2019

Ruling

Subject: Residency status of self-managed superannuation fund

Question

Will the Fund be an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997?

Answer

Yes - Year ending 30 June 20XX

Yes - Year ending 30 June 20YY

Yes - Year ending 30 June 20ZZ

This ruling applies for the following periods

Year ending 30 June 20XX

Year ending 30 June 20YY

Year ending 30 June 20ZZ

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The Fund is a self-managed superannuation fund (SMSF).

The Fund was established in Australia.

The members of the Fund are also the trustees of the Fund.

The members of the Fund are Australian residents for the income year ending 30 June 20XX.

The Fund's assets include cash at bank and shares in listed and unlisted Australian companies.

In the 20XX income year both members of the Fund left Australia. The members do not have a definite return date to Australia, however they will be returning to Australia on a regular basis to visit.

The members as sole members and trustees are managing the fund from overseas.

Member 1 holds more than 50% of the total value of the SMSFs assets.

The members as sole members and trustees manage properties and review the performance of Fund's investments from overseas.

Whilst the members of the fund are overseas they are residing in rental accommodation.

On their departure to overseas the members retained Australian bank accounts and ownership of land in Australia. The members did not sell any residential property before leaving Australia. The members have retained personal belongings in storage whilst they are overseas.

The members as sole members and trustees are still managing the fund from overseas under strict instructions given to Investment Managers to act on their behalf on investment matters. The trustees wish to continue managing the Fund and jointly make the day to day decisions.

For the income year ending 30 June 20XX employer contributions were made to the fund on behalf of one of the Fund members (September and December quarters). These contributions relate to the member's work prior to their departure to overseas.

The employer contributions paid to the fund in April 20XX relate to work performed by one of the member whilst overseas for the period January to March 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-95

Income Tax Assessment Act 1997 Subsection 295-95(2)

Income Tax Assessment Act 1997 Paragraph 295-95(2)(a)

Income Tax Assessment Act 1997 Paragraph 295-95(2)(b)

Income Tax Assessment Act 1997 Paragraph 295-95(2)(c)

Income Tax Assessment Act 1997 Subsection 295-95(3)

Reasons for decision

Summary

The Fund satisfies all of the tests in subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) and is therefore is an Australian superannuation fund for income tax purposes for the relevant income years.

It is considered that the central management and control of the Fund will remain 'ordinarily in Australia'.

Detailed reasoning

Australian superannuation fund

In accordance with subsection 295-95(2) of the ITAA 1997, a superannuation fund is an Australian superannuation fund at a time and for an income year in which that time occurs if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total market value of the fund's assets attributable to superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

Subject to the Fund meeting all of the above three tests during the relevant period, the Fund will be an Australian superannuation fund.

If a fund fails to satisfy any one of the tests at a particular time, it will not be an Australian superannuation fund at that time, even if it satisfies the other two conditions.

The Commissioner has issued Taxation Ruling TR 2008/9 entitled 'Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9). The ruling represents the Commissioner's interpretation of the definition of 'Australian superannuation fund'. In particular, it provides guidance on the meaning of central management and control (CM&C) and active member.

Test One: The fund is established in Australia or any asset of the fund is situated in Australia

The first test that must be satisfied is that either the fund was established in Australia, or any asset of the fund is situated in Australia at the relevant time. This is a question of fact.

In this case, the Fund was established in Australia and therefore satisfies the requirement in paragraph 295-95(2)(a) of the ITAA 1997.

Test Two: The CM&C of the fund is 'ordinarily' in Australia

The second test, that a superannuation fund must satisfy to be an 'Australian superannuation fund' at a particular time, is that the CM&C of the fund is 'ordinarily' in Australia. Generally, the location of where important decisions are made is the location of the relevant management and control.

The concept of CM&C is not defined in the ITAA 1997 or in the Income Tax Assessment Act 1936 (ITAA 1936). In addition, the Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 (which inserted section 295-95 of the ITAA 1997) does not provide any guidance as to its meaning. Therefore, it must be given its ordinary or common law meaning. The policy intention of the amendment was to simplify the scope of the superannuation fund residency definition and give effect to a minor policy change in respect of the application of the CM&C test.

The concept of CM&C was developed by the courts as a common law rule for determining the residence of a company.

To determine the location of the CM&C of a fund at a point in time, it is necessary to consider what constitutes the CM&C of a fund and who it is that exercises the CM&C of a fund.

Paragraph 20 of TR 2008/9 states that the CM&C of a superannuation fund involves the focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes the performance of the following duties and activities:

·         formulating the investment strategy for the fund;

·         reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments;

·         if the fund has reserves - the formulation of a strategy for their prudential management; and

·         determining how the assets of the fund are to be used to fund member benefits.

Establishing who is exercising the CM&C of the fund is a question of fact to be determined with reference to the circumstances of each case. While it is the trustee of the fund which has the legal responsibility, or duty to exercise the CM&C of a superannuation fund, the mere duty to exercise CM&C does not, of itself, constitute CM&C. If the trustee in fact performs the high level duties and activities of the fund, they will be exercising the CM&C of the fund in practice.

Location of the CM&C

The location of the CM&C of the Fund is determined by where the high level and strategic decisions of the Fund are made and where the duties and activities are in fact performed. Therefore, if the trustees of the fund ordinarily reside overseas (notwithstanding that they may be Australian residents for income tax purposes) then, unless there is the evidence to the contrary, the conclusion would be that the CM & C of the fund is overseas.

If the CM&C of the fund is being temporarily exercised outside Australia, this will not prevent the CM&C of the fund being ordinarily in Australia at a particular time.

Paragraph 32 of TR 2008/9 states:

While the CM&C of a fund can be outside Australia for a period greater than 2 years, the period of absence of the CM&C must still be temporary. Furthermore, if the CM&C of the fund is not temporarily outside Australia, it will not be 'ordinarily' in Australia at a time even if the period of absence of the CM&C is 2 years or less.

Whether an absence is temporary must be determined objectively by reference to all the relevant facts and circumstances on a 'real time' basis. That is, it cannot be established in retrospect.

CM&C - temporary absences

Where the trustees are temporarily absent from Australia for a period of up to two years, then subsection 295-95(4) of the ITAA 1997 makes it clear that the CM&C is ordinarily in Australia.

As the members absence from Australia will be for a period of more than two years, i.e from December 2018 to when they intend to return to Australia at the completion of the three years contract, subsection 295-95(4) of the ITAA 1997 does not apply.

On the other hand, it is considered that where the trustees of the fund are absent from Australia for a period greater than two years, the fund will only satisfy the test in subsection 295-95(2) of the ITAA 1997 if the trustees can establish that their absence was of a temporary nature.

Paragraph 33 of TR 2008/9 states that:

The CM&C of a fund will be 'temporarily' outside of Australia if the person or persons who exercise the CM&C of the fund are outside Australia for a relatively short period of time. The duration of the absence must either be defined in advance or related (both in intention and fact) to the fulfilment of a specific, passing purpose. Whether a period of absence is considered to be relatively short involves considerations of questions of degree which must be decided by reference to the circumstances of each particular case.

In this case, the facts indicate the high level and strategic decisions relating to the Fund and the legal responsibility for exercising the CM&C of the Fund are done by both members of the fund. Further, as no other person has been appointed to independently exercise decisions for the Fund, it follows that the high level decisions relating to the Fund are required to be made jointly by the members and the CM&C is attached to those members.

Notwithstanding the above, the Commissioner accepts that the members' relocation to the overseas country is temporary and therefore the CM&C of the Fund remains ordinarily in Australia during the period of the members stated absence from Australia, for a three year period from 26 December 2018.

This conclusion is supported by the following facts:

·         the members absence from Australia was defined in advance and is related to the fulfilment of a specific purpose, that being Member 2's employment contract overseas;

·         the members intend to return permanently to Australia when the three year contract expires at the end of Member 2s current job;

·         the members absence from Australia will not be greatly over the two year period ie three years;

·         the members have not established a permanent home outside Australia; and

·         the members continue to maintain assets and have personal belongings in storage in Australia during the period they will be overseas.

In this case, the requirement in paragraph 295-95(2)(b) of the ITAA 1997 will therefore be satisfied for the year ended 30 June 20XX, 30 June 20YY and 30 June 20ZZ.

Test Three: The 'active member' test

The third test that must be satisfied for a fund to be an Australian superannuation fund is the 'active member test'.

In accordance with paragraph 295-95(2)(c) of the ITAA 1997, the active member test is satisfied if, at the relevant time:

·         the fund has no 'active' member; or

·         at least 50% of the total market value of the fund's assets attributable to superannuation interests held by active members is attributable to superannuation interests held by active members who are Australian residents; or

·         at least 50% of the sum of the amounts that would be payable to, or in respect of active members if they voluntarily ceased to be members, is attributable to superannuation interests held by active members who are Australian residents.

As defined in subsection 295-95(3) of the ITAA 1997, a member is an active member at a particular time if the member is:

(a) a contributor to the fund at that time; or

(b) an individual on whose behalf contributions have been made, other than an individual:

(i) who is a foreign resident; and

(ii) who is not a contributor at that time; and

(iii) for whom contributions made to the fund on the individual's behalf after the individual became a foreign resident are only payments in respect of a time when the individual was an Australian resident.

The term 'contributor' in the definition of active member is not defined. Therefore, it is to be given its ordinary meaning subject to the context in which it appears. The concept of a 'contributor' within the context of the active member test is directed at establishing the status of a member as a contributor at a particular point in time, not on the specific act of contributing. In order to determine whether a member is a contributor at any particular point in time, regard must be had to all of the relevant circumstances. Particular regard should be given to the member's intention established by reference to objective evidence (paragraph 73 of TR 2008/9).

Employer contributions were made to the fund for one of the Member 1, for the income year ending 30 June 20XX as follows:

·         $XXX on 21 September 20XX - for work performed prior to member 1's departure overseas

·         $XXX on 30 January 20XX - for work performed prior to member 1's departure overseas

·         $XXX on 26 April 20XX - for work performed by member 1 whilst overseas during the period January to March 20XX. This is appears to be a one off contribution made on the member's behalf whilst overseas (for the income year ending 30 June 20XX).

The contribution of $XXX made on 26 April 20XX makes Member 1 an 'active member' at that time under subsection 295-95(3) of the ITAA 1997.

The tax agent has advised that the members of the fund are Australian residents for tax purposes for the income year ended 30 June 20XX.

As Member 1 is an active member of the Fund and is also an Australian resident then more than 50% of the total market value of the Funds assets are attributable to superannuation interests held by him as an active member and more than 50% of the sum of amounts that would be payable to him as an active member if he voluntarily ceased to be a member.

Therefore, the requirement under paragraph 295-95(2)(c) of the ITAA 1997 has been satisfied for the income year ended 30 June 20XX.

In this case, based on the assumption that the members of the Fund do not intend to make contributions to the Fund for the income years ending 30 June 20YY and 30 June 20ZZ, the Fund will have no active members whilst the members are overseas.

Conclusion

The fund is considered to be an Australian superannuation fund under subsection 295-95(2)

ITAA 97 for the year ended 30 June 20XX, 30 June 20YY and 30 June 20ZZ and will remain unchanged as long of the facts of this private ruling remain the same.

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